Wheeled Coach Implements ABC Analysis. A Firm

¶ … Wheeled Coach implements ABC analysis.

A firm using the ABC system segregates its inventory into three groups, A, B, and C. The A group constitutes the most costly or slowest turning items of inventory. It approximates 10% of the inventory items that account for 70% of the firm's investment. The B. group is the next largest amount of investment and consists of 20% of the items accounting for about 20% of the firm's investment. The C. group is the largest group of cheapest material consisting of about 70% of the firm's times and accounts for about only 10% of the firm's investment. Washers, screws, and nails would, for instance, be in this group.

As regards Wheeled Coach, the 'A' items are the expensive items such as the chassis (usually purchased from Ford), aluminum (from Reynolds Metal), and plywood used for flooring and cabinetry (from local suppliers). These few items are tightly controlled, from purchase to use, with effective security. Orders are negotiated to maximize quantity discounts while minimizing on-hand quantities. Some items, such as aluminum, must be ordered as much as eight months in advance. 'B' items are less expensive and controlled less tightly. Finally, 'C' items have less control, but all items are stored under lock and key and only removed from a secure area if they are on a Bills of Material.

Wheeled Coach would categorize its items in the following manner:

1. All items would be ranked in descending order according to their annual usage value

2. The cumulative totals of annual usage values of these items together with their percentage to the total usage value would be noted one next to the other

3. The cumulative percentage of times to the total number of items would be recorded in another column.

4. Categorizing items into A., B, and C. groups can then be made by comparing the cumulative percentage of items with the corresponding usage values.

2. If you were to take over as inventory control manager at Wheeled Coach, what additional policies and techniques would you initiate to ensure accurate inventory records?

I would get to know the various other methods that can be adapted to better value the raw material -- vis. The following -- and play around with them in order to assess which one/s I would decide to use. I might use more than one at different times, alternating according to the need of the moment.

The pricing methods are the following:

1. First-in-First -- Out method (FIFO). A firm utilizing the FIFO method will price its raw material by prioritizing according to the store from which it was first received. The material that was obtained first, will be the first that will be priced.

2. Last-in-first-out (LIFO). A firm utilizing the FIFO method will price its raw material by prioritizing according to the store from which it was last received. The material that was the most recently obtained will be the first that will be priced.

3. Weighted average cost method: Weights will be given based on the quantity. In other words, material will be priced on weighted average.

4. Standard price method. When the material is purchased, the stock account will be debited with standard price. The difference between the standard price and the purchase price will be put into a variance account.

5. Replacement / current price method: Here material is priced at the value that is realizable at the time of issue.

3. How would you go about implementing these suggestions?

The ABC inventory and valuation of work in process depends on the method of pricing the raw material and on the method of costing used to apportion the fixed manufacturing overheads.

Absorption costing and direct costing are two methods that can be used to help in this aspect, and both techniques allocate costs to the inventory.

1. Direct Costing works in the manner that one tracks the cost to the cost item or objective. All indirect costs (such as fixed manufacturing overheads) are known as period costs and charged to the income statement. Fixed costs that are identifiable are considered for inventory valuation.

2. Absorption costing considers fixed manufacturing overheads as item costs. Accordingly, all costs, both variable and fixed will be assigned to the inventory value.